Institutional Analysts Are Practically Worthless: The Case of Maxim

On December 18, 2008, I bought Maxim (MXIM) at 12.00/share and told my readers about my buy. Maxim is now selling for $13.70/share--a 14.1% increase in four months. The S&P 500 declined 3.1% during this same time period.

At the time I bought Maxim, JP Morgan disagreed with me. On December 16, 2008, JP Morgan's Christopher Danely downgraded Maxim stock to "underweight." In response, I wrote:

"Almost all these these analyst downgrades come after the bad news has already been released. Consequently, when a major firm issues a 'sell' or 'underweight' rating, that's when contrarians and value investors should take a closer look at a stock."

My call was obviously correct, but what's really frustrating is that now, after the run-up in the stock price, several analysts are recommending Maxim.

On March 14, 2009, Canaccord Adams upgraded Maxim. Maxim's stock price was $14.05/share.

On March 15, 2009, Citigroup upgraded Maxim. Maxim's stock price was $14.12/share.

If you had listened to these two analysts, you would be losing money right now. I don't disagree with the analysts' upgrades, assuming a long term horizon. I still think Maxim is somewhat undervalued, but I have considerably reduced my holdings and am waiting to re-enter at a lower price.

I continue to be skeptical of institutional analysts and their ratings. We need an independent website that ranks firms and their analysts based on their actual performance over three, twelve, and twenty four month horizons. The website should follow various analysts and rank them based on stock performance following an upgrade or downgrade. Hedge funds or well-off investors have access to such information, but the ordinary public is left in the dark when ascertaining analysts' credibility. That's a shame, because the public's relatively short term memory allows most analysts and their firms to avoid accountability. The Motley Fool has tried to create something along the lines of what I've suggested, but it doesn't track professional analysts.

I have been told that FusionIQ's proprietary software does rank analysts. I have been given complimentary access to the software, but have not had the time to actually sign on and evaluate it. I hope to provide a report on FusionIQ at some point in the future.

Disclosure: I own Maxim shares, and a family member works for Maxim.

Comments

[Steve in TN:]

Maybe some will get useful information from equity analysts, but I use them generally as contrarian indicators - especially at market turning points.

Apr 28 09:32 AM

[Gtarras:]

"We need an independent website that ranks firms and their analysts based on their actual performance over three, twelve, and twenty four month horizons."

Ironically, there has NOT been many university research publications on that, although i'd think this theme would make a great PhD project..

I saw just one that came out last year (from an Ivy League school), and the conclusion was in line with yours:

MORE THAN 50% OF THE TIME THE ANALYSTS RECOMMENDATIONS ARE WRONG.

I have always considered the analysts more of price chasers, rather than "price setters".. Ask yourself a question: if you are so smart, why not become a trader and make way more money on the trading desk, rather than in your ivory tower? also, how many scandals have we had over analysts talking their banks' books rather than serving clients.. Goldman Sachs, anyone?

Apr 28 01:14 PM

[Justin Time:]

Nice trade on Maxim - did your entire portfolio outperform the market or are you selectively talking up only your winner(s)? I don't disagree with the supposition that many Institutional Analysts are useless, but I think a blanket condemnation only shows your lack of understanding of the brokerage business. Published buy/hold/sell calls are a very small part of the value that analysts provide to institutional investors - they are not publishing for the individual investor or short term trader. Buy/hold/sell changes are often late and after the stock has moved significantly, but the good analysts have been communicating the changes in business fundamentals they are seeing to their institutional clients long before the rating change is officially made. Many large institutional investors have said that they don't even look at the buy/hold/sell call - they consider the decision on when to buy or sell a stock their value add - they look to analysts for information to help them reach their own buy/sell decision. That information is communicated every day, while ratings changes may occur 2 or 3 times a year. One final point and I will get off my soap box - if you are an institutional analyst and you change your ratings as frequently as you buy and sell a stock - holding your Maxim for a couple of months for a 14% gain - you will piss off your sales force and your clients, and will eventually get fired. Large institutions can't trade in and out of stocks like a day trader. Just be aware of the difference in audience between an individual short term trader and the base of constituents a large brokerage firm does business with.

Apr 28 08:41 PM

[Steve Szirom:]

there is a website which tracks the analyst upgrades and downgrades for semiconductor stocks, at www.insidechips.com/pu...

Apr 29 04:04 PM